SMEs struggling with cash flow and using up reserves

Many UK small and medium-sized enterprises (SME) are struggling with cash flow and are relying on their reserves to finance growth, according to new research.

The British challenger bank, Aldermore, surveyed 300 SMEs and found that 38% are depending on cash reserves to fund future development. A further 12% said they will turn to a bank loan, and 9% to an overdraft. The remainder planned to use other forms of finance or were not planning to fund any future growth at this time.

Meanwhile, research by Baker Tilly shows that SMEs continue to struggle with cash flow problems. The Baker Tilly SME Distress Monitor, which covers 25,000 businesses, found that 24% of SMEs had insufficient funds to pay their short-term debts. It means they may not be able to fund any future recovery.

The research also indicated that sales were holding up better than profitability, which could indicate that businesses are discounting prices, which is leading to an increase in pressure on their margins.

Bruce Mackay, Restructuring and Recovery Partner for Baker Tilly, said: “The economic climate is still proving to be a challenge for UK SMEs. Many companies are selling more but at narrower margins.

“What concerns me is the large number of SMEs that are struggling to pay their short-term debts. Previous recessions have shown that businesses risk failing due to cash flow constraints as the economy starts to recover.

“This is mostly down to businesses overtrading, and I fear we may see more businesses going under if they aren’t able to manage their working capital needs effectively.”

The perilous state of some SMEs highlights the need for firms to keep a tight rein on their credit control. Failure to enforce prompt payment can lead to cash flow problems and may even result in the debt having to be written off if a debtor goes out of business.

Please contact Clare Jones for more information about the issues raised in this article or any aspect of credit control and debt collection.